Inflexibility of labour market and lack of internal competition, low levels of investment

Decline in the quality of bank portfolios

Youth unemployment rate at 25%

Slow-functioning legal system

RISK ASSESSMENT

Slight slowing of growth in 2018

The positive eurozone economic situation continues to help boost the Portuguese economy, which benefited from increased external demand and a recovery in investment in 2017. Companies have replaced capital equipment in order to satisfy the growth in demand, while the production capacity utilisation rate returned to close to that of 2008. The growth in exports was confirmed during the year and there was an increase in the market share captured by equipment exports. Exports of services were in turn boosted by a rise in the numbers of tourists. These two growth drivers have made up for the reduced contribution to growth from household consumption which, whilst positive, has tended to slow since 2016.

Activity will likely gradually slow during 2018. The increase in employment and the reduction in taxes on middle class households will help sustain consumption, while investments by companies will be restrained by higher corporation taxes. Public investment is, however, expected to take the strain: the 2018 budget forecasts a +0.4 GDP point increase in this. Despite the slowdown expected in the United Kingdom and Spain, exports should remain strong, – notably automotive exports, which will be boosted by the increase in production capacity at Autoeuropa. The company should reach a production capacity of 200,000 units in 2018 (85,000 in 2016). Unemployment should continue downwards to reach 8.6% in 2018.

The uptick in growth in 2017 was positive in terms of company insolvencies, which - despite recording a significant reduction – remain at pre-crisis levels. The deleveraging process for the private sector is continuing, but the level of company indebtedness is no lower (137% of GDP in September). The banking sector is also extremely fragile. Low profitability, as a result of the high level of bad debt, will continue to slow the internal recapitalisation of the banks. This will restrict their abilities to lend to viable companies. While the credit situation for companies remains weak, with companies preferring self-financing, the situation for households is improving.

Continuation of budgetary consolidation

The improved economic situation, the reduction in the cost of servicing the debt, and reduced public investments made it possible to reduce the public deficit to 1.4% in 2017, 0.6 percentage points below that in 2016. With the public accounts under control, the country was able to officially end the excessive debt procedure initiated by the European Union in 2009. In addition, the favourable market borrowing conditions and investment spending below the level forecast in the budget enable the government to make an early reimbursement of an instalment of USD3bn to the IMF. In 2018, budget policy is expected to be more expansionary which earned the Portuguese government a rebuke from Brussels with the presentation of the budget. The government plans to cut taxes for middle income households and raise taxes on companies. The differential will also be made up by means of new taxes on consumption (taxes on cured products). Capital expenditure is expected to rise whilst current spending should contract. The public deficit will stabilise whilst remaining above the 2% mark. Although the primary balance is expected to remain in surplus, the reduced cost of debt made possible thanks to low interest rates (2.8% in 2018) should help reduce the cost of the debt servicing.

As a consequence of the upgrading of the country by Standard and Poor’s (S&P) from “BB+” to “BBB-”, Portugal was taken out of the “junk” investment category in which it had been placed back in January 2012 and should see a reduction in the yields of government bonds. The level of the public debt however remains high but is on a downwards trajectory that is expected to accelerate in 2018 and reach 124.1% (6 pp less than in 2016). In addition, whilst under control, the scale of the debt gives rise to concerns about its viability which depends in part on its eligibility for the European Central Bank’s purchase programme. The announcements from the Central Bank seem to be indicating a gradual reduction in the volume of asset purchases. In 2018, this should drop from EUR 60 bn to EUR 30 bn.

The current account balance will remain at equilibrium, underpinned by the vitality of manufactured exports and tourism which will offset the increase in energy and capital goods imports.

The leftist coalition holds firm

The municipal elections of 2017 confirmed the strength of the Portuguese left following a difficult year for the government of António Costa. The leftist coalition which includes the Socialist Party, the Communist Party and the Green Party, was shaken by a number of scandals involving several of the government’s Secretaries of State. The Galpgate scandal named after the oil company that had invited three Secretaries of State to Paris to watch European Championship football matches brought about a ministerial reshuffle. At the same time, the tragedy of the Pedrogão fire that resulted in the death of 64 people and more than 250 injured, also damaged the government’s popularity. The Prime Minister has however so far succeeded in managing people’s expectations by ending the austerity programme, whilst continuing to comply with the commitments made to the European Commission, although his political are pressing for a negotiated debt reduction, which could make the job of the executive much more complicated.

Last update : January 2018

Payment

Cheques are frequently used in Portugal and it is common practice to establish payment plans with post-dated cheques which are payable on presentation. If the bank account is not sufficiently provisioned, they are borne by the bank, up to a maximum amount of EUR 150. In the case of bounced cheques, an individual person or a company is prohibited from receiving or issuing further cheques for a maximum term of two years (or eventually six years, if there is a court decision).

Bills of exchange are commonly used for commercial transactions in Portugal. In order to be valid, they are subject to stamp duty, the rate of which is set each year in the national budget. At the time of writing, the rate of stamp duty is 0.5% of the amount of the bill, with a minimum value of one euro.

A bill of exchange is generally deemed independent of the contract to which it relates.

In the event of a payment default, creditors are not required to issue a protest notice before bringing an action to court, but such a notice can be used to publicise the matter and thus put pressure on debtors to honour their obligations, albeit belatedly.

Cheques, bills of exchange, and promissory notes offer effective guarantees to creditors against defaults, as they are legally enforceable instruments which entitle debt holders to initiate “executory proceedings”. Under this process, creditors can petition the court to issue a writ of execution and notify the debtor that this has been done. When debtors still fail to settle their debts, the creditors may request that the court officer issues an attachment order against the debtors’ property.

Electronic transfers via the SWIFT network are widely used by Portuguese companies and are a quick, reliable and economic means of payment. If the buyer fails to make a transfer, the legal recourse is to institute ordinary or summary proceedings, based simply on an unpaid invoice.

Debt collection

Amicable phase

Amicable collection begins with the debtor being sent four demands for the payment of the principal amount. Interest on the principal can be requested - but this is normally difficult to collect in Portugal. Payment agreements subsequently made between creditors and debtors can include guarantees to ensure payments will take place as agreed.

Interest rates are set by the Treasury Department. The rates are published in the Diário da República during the first fortnight of January and July each year, and are applicable for the following six months. These interest rates are applied by default, unless the parties involved in a commercial agreement have contracted otherwise.

Legal proceedings

Fast-track procedure

The order to pay procedure (Injunção), which is applicable to uncontested commercial claims, was established in March 2003. These proceedings, whatever the amount involved, are heard by the court in whose jurisdiction the obligation is enforceable, or the court where the debtor is domiciled. Since September 2005, these injunctions can also be served electronically.

The National Injunctions Office (Balcão Nacional de Injunções, BNI) has exclusive jurisdiction throughout the country for the electronic processing of order to pay procedures.

Ordinary proceedings

In cases of disputed claims, creditors can initiate formal, but more costly, “declarative proceedings” (acção declarativa), to obtain a ruling which establishes their right to payment. Once the claim is filed with the court and the debtor notified, a defence can be filed within 30 days. Failure to reply entitles the court to deliver a default judgment. If the judge rules in favour of the creditor, the court may order damages, if requested by the demanding party. They then need to initiate “executive proceedings” (acção executiva) to enforce the court’s ruling.

Under the revised Code of Civil Procedure, any original deed established by private seal (i.e. any written document issued to a supplier) in which the buyer unequivocally acknowledges his debt, is deemed to be an agreement which is enforceable by law. Since 2013, when the most recent revision of the Code of Civil Process was made, written signed payment plans can only be used to initiate “executory proceedings” when they have been recognised by a notary.

In the scope of the recent restructuring of Portuguese courts which has been ongoing since 2014, more courts specialising in commercial issues have been created. The number of Courts of First Instance has been reduced to 23 (in each district capital), while there are now 21 sections specialising in commercial issues secção de Comercio (Secções de Competência Especializada). These sections deal specifically with insolvencies and commercial company matters. During this same period, 16 sections specialising in Enforcement Procedures (Secções Especializadas) have also been created.

Legal actions in Portugal can take several years, depending on the complexity of the case. Enforcement proceedings can be faster, depending on the existence of assets.

Enforcement of a legal decision

Once all avenues of appeal have been exhausted, a judgment normally becomes final and can be enforced. If the debtor fails to comply with the decision, the creditor can request compulsory enforcement mechanisms before the Court – either through an Attachment Order, or by allowing payment of the debt to be obtained from a third party which owes money to the debtor (Garnishee Order)

Foreign awards rendered in other EU countries benefit from specific enforcement mechanisms, such as the European Enforcement Order (which can be used if the claim is undisputed), or the European Small Claims Procedure. Awards rendered in non-EU countries must be party to a bilateral or multilateral agreement with Portugal on the recognition and enforcement of court decisions.

Insolvency proceedings

Out-of court

A special extrajudicial administrative procedure (“RERE – Regime Extra Juditial de Recuperação de Empresas”) came into effect on 1 July 2017. This procedure for restructuring company debts is carried out by specialised mediators. It has been designed to enable creditors and debtors to reach a compromise, in a confidential and consensual manner.

Restructuring proceedings

The reforms implemented in 2012 included the introduction of a special rescue procedure (Processo Especial de Revitalizaçao, PER). The aim of this new procedure is to ensure the recovery of debts from debtors that are in a ‘difficult economic situation’ without starting an insolvency procedure. The management is obliged to request permission from the provisional judicial administrator in order to perform “particularly relevant acts”. During this process, the administrator prepares a recovery plan which must be approved by the creditors and a judge.

Bankruptcy

Insolvency law in Portugal also provides for insolvency proceedings (Processo de Insolvência). The main goal of these proceedings is to obtain payment for the company’s creditors through the implementation of an insolvency plan. Insolvency plans can be established under which the company is restructured and can continue to operate. Should this prove unfeasible, the insolvent’s estate is liquidated, and the subsequent proceeds are distributed among the creditors.